How Does Betfair Work? Betting Exchanges Explained in Full

When you begin your career as a football trader, you need to understand exactly how betting exchanges work.

They are an essential part of your football trading toolbox and the platform on which your profit is banked.

Rather than going up against a bookmaker, in order to make a profit on an exchange you have to outsmart other football traders. That sounds like a lot of fun (and it is!) but it's also extremely challenging. You need to win the battles more than you lose in order to end up with a profit overall and no-one hands their hard-earned money over easily. Thankfully, you have Goal Profits on your side and all the trading tools we have developed which give you a massive advantage.

Betfair is the best betting exchange that most football traders use on a daily basis, but there are a number of other options, including Matchbook, Smarkets and BETDAQ. There are times when using a different exchange makes sense and I will talk about that as we go.

I have also captured a number of screenshots to show you exactly how betting exchanges operate - so let's begin!

What is a Betting Exchange?

A betting exchange is where traders can place bets against other sports fans, rather than against the bookmaker, as in traditional betting.

Very simply, a betting exchange allows a user to bet on or against something happening (usually in the context of a sports event). One of the main differences of an online betting exchange when compared to a traditional bookmaker is the chance to trade in-play.

For example, if you place a bet on a football team before the start of a match at a sports exchange such as Betfair, you will be able to change your position during the game. You will be able to lock in profits or reduce losses as the game progresses and goals are scored (or not).

Another key benefit of online betting exchanges is that they typically offer better odds than a traditional bookmaker, which is vital for a football trader who needs to find the best possible odds for a bet. In fact, research has shown that betting exchanges can offer up to 20% more value overall. This can make a massive difference to your long-term profit if you are placing a lot of bets.

Finally, you will not have your exchange account closed or "gubbed". Online bookmakers do not want customers who win long-term as it eats into their profits, so they restrict accounts whenever they feel threatened. This is a completely unfair practice (and now illegal in Australia) but happens all too often in the UK.

I had my Bet365 account restricted after taking advantage of their in-play football betting offers. They sent me emails about the offers, but when I took part I was then told that it was a "trading decision" to restrict my account. Online bookies simply want to attract losing punters and make money from them. I understand that they're in business to make money, but some ethical standards wouldn't go amiss!

Anyway... exchanges have had a revolutionary impact on the sports betting industry. While some football traders use both bookmakers and betting exchanges to make their money, a growing number are choosing to avoid bookmakers altogether.

How do Betting Exchanges Work?

Betting exchanges are an online marketplace where sports fans can bet against each other on global sporting events. The exchange is simply acting as the middleman, allowing users to both set a price for their bet and take a price that others are offering.

Because punters are backing and laying bets against each other, the exchange doesn't mind at all who wins or loses. This results in better odds and a much more efficient book than you will ever find at a traditional bookie who also has to add in a profit margin.

There are a couple of key things to understand:

Betting exchanges make their money through charging commissions, rather than by adding an overround (profit margin).

You can only back an outcome at a bookmaker, whereas at an exchange you're able to both back and lay.

I'll explain both of these in full, starting with exchange commissions.

Betfair Exchange Commission

Exchanges make their money by charging commission, most often on winning bets only. They all have their own ways of calculating commission payments, but for this explanation I'll concentrate on Betfair which is the most popular betting exchange in the UK.

If you make a net profit in a Betfair market, you will be charged a commission. For example, if you back a home win and the game ends 1-0, you will be charged a percentage of your profit. However, if the game ends 1-1 then you will have lost your bet and there will be no commission to pay.

Taking it a step further, if you back a home win and decide to "green up" the market at 1-0 to protect your profit, then you will be using some of your potential profit to cover the other outcomes in the Match Odds market. Your net profit at the end of the game will be lower and, therefore, you will pay less commission.

If that doesn't make sense right now, don't worry as I will be talking about backing, laying and trading a little later on. All you need to understand at this point is that Betfair will charge commission as a percentage of your net profit.

How does Betfair Calculate Commission?

Betfair calculates its commission by multiplying your net profit by the Market Base Rate. From there, they apply a discount depending on how much money you have put through the exchange.

At the time of writing, the Betfair Market Base Rate in the UK is 5% so if you're a new customer, that's what you will be charged. However, the most experienced traders who trade with much larger stakes have been able to get their commission rate down to around the 2% mark.

As you can imagine, this can have a massive impact on your profit margin!

The size of the commission discount - which Betfair sometimes describes as the "Discount Rate" - depends on how many Betfair Exchange Points you have been able to accrue on your account.

The more you trade on Betfair, the more Betfair Exchange Points you will receive. This improves your Discount Rate and reduces the amount of commission you have to pay on your winning bets.

This is how Exchange Points are calculated:

You earn one point for every 10 pence of commission that is paid out of your account from any net winnings on the site.

The same rate is also in effect for implied commission (which is in the event of you having a net loss).

Betfair Exchange Points are added to an account equally, no matter whether your bets have won or lost.

If you want to find a complete history of your Betfair Points, click on 'Betfair Points Statement' in the 'My Account' section of the site.

What is a Betfair Holiday?

If you don't trade on the exchange, your Betfair Exchange Points total will erode by 15% each week.

You can prevent this by taking a "Betfair holiday" which freezes your points for one week. All new customers automatically receive one Betfair holiday when they join, then an extra week is added each three months (up to a maximum of four weeks worth).

It's worth noting that if you trade during a Betfair holiday, you will not see any points added to your account either - your points are frozen.

Betfair Premium Charge Explained

You may be aware of an additional Betfair tax on winnings known as "Premium Charge". According to Betfair, only around 0.5% of people with an account are affected by Premium Charges, but considering millions of people use the exchange this could still work out to be a significant number.

You will be considered as a potential payer of the Betfair Premium Charge if your account matches the following conditions.

Firstly, your account is in profit over the course of its lifetime.

Secondly, that the total charges generated by your account are less than 20% of the gross profits you have made.

And thirdly, that your account has been used to bet on 250 separate exchange markets.

If your account meets the above three conditions, there is a chance you will be deemed eligible to pay the Premium Charge and you will be informed by Betfair. No charges will be taken out of your account before you have been told of the change to your account status.

Firstly... don't panic! You're only going to pay Premium Charge if you're winning on Betfair and it's considered by many to be an achievement.

Once you have been informed that you're eligible to pay Premium Charge, it will be withdrawn automatically from your account each Wednesday to bring your "total charges" up to the 20% of profit benchmark.

Some users have complained that the Betfair Premium Charge is too complicated to understand and it does seem to be a bit of a minefield that the average trader may struggle to get their heads around, which is partly why its introduction was met with such a negative reaction.

How to Avoid Premium Charge

Betfair Premium Charge avoidance is a controversial subject. For some traders, Premium Charge is a sign of greed for a company that is virtually certain to make profits due to its status as the leading betting exchange in the UK.

However, others believe that it deters market makers from using automated bots to siphon profits and that it is only fair for those with extremely profitable accounts to pay more.

Whatever your view, remember that betting profits in the UK are tax-free so paying 20% when you're making money on the Betfair exchange is not as big an issue as many try to make it out to be. You can always close your Betfair account if you object that strongly!

The one way that I recommend to avoid paying Premium Charge - or at least to reduce the amount payable - is to use different exchanges whenever you can. Because of liquidity issues it would be difficult to trade a correct score market in French Ligue 2 at one of the other exchanges, but Match Odds in the Premier League would have no such problem. Bear in mind that your favourite trading software may not work on other exchanges, so you will need to trade manually.

Some will suggest finding arbs in order to reduce profits at Betfair, but this takes a lot of time and you will soon find that your bookie accounts are closed or gubbed. It's only a temporary solution and not worth the effort; you're much better off spending the time on your football trading.

It has also been suggested that you could use multiple Betfair accounts, however this is strictly against Betfair's terms and conditions. They have a dedicated team who investigate and suspend suspicious accounts, so you would have to go to great lengths in order to evade detection. It's not worth the risk, so don't be tempted to try this.

Open accounts at other exchanges, use them when you can and pay as little Premium Charge as you have to.

What does Back and Lay Mean in Betting?

The ability to back and lay bets is a key difference between traditional bookmakers and betting exchanges.

In the simplest terms:

A back bet is when you are betting on something to happen.

A lay bet is when you are betting on something not to happen.

For example, if you think that Manchester United are going to win their next home match you could place a back bet on the home win. But if you think they are not going to win, you could lay the home win. In that instance, your bet would win as long as Manchester United do not win, ie if the match ends in a draw or an away win.

By placing a lay bet, you are effectively taking on the role of the bookmaker by offering odds that can then be taken by another user. So if you lay Manchester United, Betfair will find another trader who wishes to back Manchester United at the price you're offering and match the two sides - back and lay.

Back and Lay Betting Explained

As you can see by the odds offered on Betfair, England are the favourites to win this match. In case you don't know already, the back odds on Betfair are listed in blue, while the lay odds are coloured in a rather fetching shade of pink.

With back odds of 1.79, you would win £7.90 for every £10 you choose to stake (less commission).

However, when you are laying a bet you are betting against that outcome.

The lay odds (in pink) for England against Netherlands in this match are currently set at 1.80.

This means that for every £10 you choose to stake, your lay bet liability is £8. If you lay England and they go on to win the game, you lose £8 but if the match ends in a draw or a win for the Netherlands, your profit is £10 (less commission).

You can back and lay at the prices shown in the market, or you can set your own odds. If you decide that 1.80 is not the right price to lay at, you could opt to lay England at 1.75 instead. You would not get matched right away as other users would be happily backing at the higher price of 1.79, but the price may move once team news is announced if the market decides that England have become stronger favourites.

The figure shown below the odds is how much money there is in the market at this time. So, in the example given above, another £2,800 could be laid on England at 1.80 before the price would change, while there is £514 available to bet on England to win at the price of 1.79.

Football matches between the most popular teams typically have a lot of money in the Match Odds market, especially as kick off time approaches. However, some of the other markets that are offered on the main sports exchanges - for instance the c﻿orrect sc﻿ore﻿ marke﻿t - may not have a lot of money in them in smaller leagues, which affects the odds on offer.

Backing and laying for profit is how football traders make their money, so make sure you fully understand what you are doing before you start placing your bets on Betfair. Getting it the wrong way round can be an expensive mistake!

How to Make Money on Betfair

If you're new to exchange trading, it may seem quite daunting at first. However, if you take the time to learn then it is perfectly possible to make consistent, long-term profits and even a full-time living from Betfair.

Punters used to focus on how to make money betting on football, but in recent years there has been a definite switch to football trading. This has provided liquidity to the markets and opened up far more opportunities for ordinary people to find success the that was once out of reach.

Betting with traditional bookmakers has become increasingly difficult. Not only do they attempt to inflate their profit margins (overrounds) but they are shutting down profitable punters more aggressively than ever. If you're serious about making money from betting, then betting exchanges really are your only viable option.

Of course, you're going to need a portfolio of profitable trading strategies, but your mindset is also going to play a huge role in your success. You will need to be patient enough to wait for the right opportunities, disciplined enough to stay out of weak trades and level-headed enough to avoid chasing losses. It takes time and practice to learn how to trade football, but the rewards are well worth the effort.

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List of All Betting Exchanges

There are four main UK betting exchanges to open accounts with before starting out on your trading journey. The new customer bonus offers will come in handy, plus alternatives to Betfair will reduce your exposure to Premium Charge once you become a very profitable trader.

Make sure you are comfortable with how each exchange works before placing bets or opening trades.

Betfair

Betfair is the biggest and best betting exchange in the world so, therefore, it is hugely popular among sports traders.

Founded in 2000 by Edward Wray and Andrew Black, today Betfair has four million customers, from all around the world, while the company boasts a turnover of around £50 million a week. In early 2016, Betfair - which employed more than a thousand people - underwent a merger with the traditional bookmaker Paddy Power to form a new company named Paddy Power Betfair.

Betfair also offers a sportsbook as well as a sports exchange, so it is easier than ever before to check out the different odds that are on offer from both a bookmaker and from other traders.

The standard commission rate paid on winnings at Betfair is set at 5% but some account holders are able to reduce this figure to just 2% by placing a greater number of bets on the site.

Matchbook

The second of the main UK betting exchanges is Matchbook, which used to charge a 1% commission, but this was increased to 1.15% in 2016.